Quiero saber acerca de...

53236

Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules
lotter on DSK11XQN23PROD with PROPOSALS1

CRT credit risk capital relief. The 10
percent risk weight floor adds minimum capital requirements to all retained CRT
exposures, no matter how remote the credit risk. The effectiveness adjustments reduce the risk-weighted assets of transferred CRT tranches, thereby reducing the capital relief afforded by the CRT. Of these three elements included in the ERCFs CRT
treatment, the risk weight floor drives the majority of the reduction in credit risk capital relief due to the relative size of the low-risk CRT exposures the Enterprises generally retain. For example, the stylized CRT transaction in FHFAs 2020 re-proposed capital rule showed capital relief of 38 percent due to the CRT.13 However, absent the risk weight floor on retained exposures, capital relief would have been approximately 66 percent.
Rationale for Revisiting the ERCFs CRT
Treatment CRT is an effective mechanism for distributing credit risk across a broad mix of investors and has become an integral part of the Enterprises business models. FHFA is proposing amendments to the ERCF that would revise the CRT securitization framework for several reasons.
First, if an Enterprise retained every tranche of a CRT, its post-CRT credit risk capital requirement for the CRT
exposures would be higher than its preCRT credit risk capital requirements for the underlying mortgage exposures due to the structural and modeling risk of the CRT itself. The capital relief afforded by the ERCF CRT securitization framework more than offsets this socalled securitization penalty, but within the securitization framework, potential capital relief is limited by adjustments that reflect various ways a CRT might be less than fully effective at transferring risk. Increasing the capital relief for CRT
by reducing these effectiveness adjustments could improve the safety and soundness of each Enterprise by encouraging the transfer of risk so that each Enterprise can fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle.
Second, FHFA believes that part of the process to responsibly end the conservatorships of the Enterprises includes the transfer of a portion of the Enterprises credit risk to private markets. Such activity allows the Enterprises to maintain their core businesses, fulfill their statutory missions, and grow organically while simultaneously shedding risk that could 13 85

FR at 39335 June 30, 2020.

VerDate Sep<11>2014

16:47 Sep 24, 2021

Jkt 253001

otherwise prevent them from accomplishing these goals. It is possible that in the absence of risk transfer, required capital may increase faster than retained earnings and the Enterprises may therefore grow farther from achieving capital adequacy and exiting their conservatorships. To the extent that the earnings expenses of CRT are smaller than the capital relief provided by CRT, executing CRT would help alleviate this issue.
Third, a revised risk-based capital treatment for CRT could facilitate regulatory capital planning in furtherance of the safety and soundness of the Enterprises and their countercyclical mission. The Enterprises CRT programs, which FHFA has in the past required to cover 90 percent of the UPB of target loans generally those with an LTV greater than 60 percent and a loan term greater than 20 years, help facilitate the continued acquisition of higher risk loans throughout the economic cycle due to capital relief afforded to risk transfer. In addition, as adopted, the ERCFs CRT framework does little to complement the single-family countercyclical adjustment. Revised CRT incentives could, for example, help to align the issuance of CRT with changes in the countercyclical adjustment.
Fourth, prior to finalizing the ERCF, FHFA received a significant number of comments on FHFAs proposed approach to CRT. Many commenters expressed the view that CRT is an effective means by which to transfer risk to private markets, protect taxpayers, and stabilize the Enterprises and the housing finance market more generally.
Consequently, most of these commenters suggested that the proposed treatment of CRTs was too punitive and would imprudently discourage CRTs.
Many commenters criticized the 10
percent risk weight floor and the overall effectiveness adjustment, arguing that FHFAs proposed policy choices would unduly decrease the capital relief provided by CRT and reduce the Enterprises incentives to engage in CRT. FHFA nevertheless adopted the risk weight floor as proposed, citing a belief that 10 percent represents an appropriate capitalization for the credit risk in these retained risks and a favorable comparison to the U.S. bank regulatory framework. To account for the fact that CRT does not provide the same loss-absorbing capacity as equity financing and to reduce the extent to which the proposed 10 percent adjustment may lead to more regulatory capital than is necessary to ensure safety and soundness, FHFA adopted a
PO 00000

Frm 00007

Fmt 4702

Sfmt 4702

modified overall effectiveness adjustment that starts at 10 percent and decreases with an exposures credit risk.
FHFA also received comments on the interaction of CRTs and the leverage ratio requirement. Several commenters expressed concern about the potential adverse impact of a binding leverage requirement on CRTs. Specifically, commenters indicated that a binding leverage requirement would provide no incentive for the Enterprises to lower their risk-based capital requirements and therefore would disincentivize CRTs, which could lead the Enterprises to reduce or halt their CRT programs and increase the risks held in portfolio.
III. Proposed Requirements A. PLBA
The proposed rule would amend the ERCF by replacing the fixed PLBA equal to 1.5 percent of an Enterprises adjusted total assets with a dynamic PLBA equal to 50 percent of the Enterprises stability capital buffer as calculated in accordance with 12 CFR
1240.400.
The Enterprise-specific stability capital buffer was designed to mitigate risk to national housing finance markets by requiring a larger Enterprise to maintain a larger cushion of highquality capital to reduce the likelihood of a large Enterprises failure and preclude the potential impact a failure would have on the national housing finance markets. Such a buffer creates incentives for each Enterprise to reduce its housing finance market stability risk by curbing its market share and growth in ordinary times, preserving room for a larger role during a period of financial stress, and may offset the funding advantage that an Enterprise might have on account of being perceived as too big to fail. The stability capital buffer is based on a market share approach, where each Enterprises stability capital buffer is directly related to its relative share of total residential mortgage debt outstanding that exceeds a threshold of 5 percent market share. The stability capital buffer, expressed as a percent of adjusted total assets, increases by 5
basis points for each percentage point of market share exceeding that threshold.
The proposed rule would replace the fixed 1.5 percent PLBA with a dynamic leverage buffer determined annually and tied to the stability capital buffer. The stability capital buffer is an effective proxy for the U.S. banking frameworks GSIB capital surcharge and the Basel higher loss-absorbency risk-based requirement as it is designed to address the predominant threat an Enterprise poses to national housing marketsits
E:FRFM27SEP1.SGM

27SEP1